Iceland’s Radical Reform – Another Braindead Idea

Posted Apr 3, 2015 by Martin Armstrong

Far too often people fail to understand banking and credit merely making superficial judgments that lack any real in-depth understanding of the world financial system. The common assumption is that the greatest curse of mankind is that commercial banks create money through lending and then securitize such loans selling them into the marketplace illustrates the childish view of finance and the difference between a Dark Age and Capitalism.

It was after the fall of Rome when all banking did not exist and neither did wages or private ownership. They simply blame ALL of banking and fail to grasp the difference between relationship banking and transactional. On top of that, they completely are blind to the fact that the issue is proprietary trading not the entire banking system. Eliminate lending, which they seem to demonize as the creation of money, and the real estate market would crash into dust, credit cards would vanish, education, medicine, an business loans would collapse, and effectively you would end up with a MadMax Dark Age. All because they want to stop what they think is the creation of money.

This extreme uneducated assumption that money should be tangible with a constant value has NEVER existed in history since even when there were gold coins they fluctuated in purchasing power value and suffered debasement. No matter what evidence you present, no they are right and history does not matter. These people argue banks are the entire cause of the boom-bust cycle and they want to destroy them like Andrew Jackson. This is of course at the heart of the problem. This is the dangerous Marxist view where they cannot understand the business cycle so they want to destroy it and flat-line the economy. This very idea has killed millions of people, yet there are those who constantly preach the same nonsense. It seems to be closet-Communists preaching eliminate all banks rather than bother to understand relationship v transactional banking and the business cycle.

Iceland seriously lacks this in-depth understanding of how the economy works and their radical proposal will certainly destroy their economy faster than anyone suspects. This effort looking to end the boom-bust cycle with uneducated view of money and banking and putting bureaucrats in charge is the worst idea imaginable. Iceland will become the new land of April Fools who also existed because of their uneducated bias.

Back in 1582, the original goal of the Gregorian calendar was to change the date of Easter. When Pope Gregory XIII introduced his Gregorian calendar, Europe adhered to the Julian calendar, first implemented by Julius Caesar in 46 BC. Because groups of people hated Catholics, they refused to change and celebrated New Years on April 1st instead of January 1st. They were mocked and called “April Fools”. These people who yell money must be tangible and wrongly assume it always has been backed by gold, are probably “Financial Fools” for no matter what you show them from history, they will never abandon that belief.

Keep in mind this is proposal is highly Marxist and eliminating the leverage effect of lending by the free market will ripple through the entire economy causing a deflationary collapse of just about everything from home prices to wages. Is it the creation of money by lending, or is it the lack of relationship banking that has been replaced with transactional banking?

Icelandic government suggests removing the power of commercial banks to create money and handing it to the central bank is some sort of solution. This is anti-free markets and if there is anything we have learned from history, government is incapable of managing whatever has to do with money. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money through credit. You deposit money in a bank and your statement saw you have 100 whatever and the bank lends 95 of that to someone else so you both have about 100 in book entries. This is the great evil these people are targeting without the first historical concept of what they are fighting against. They mix up proprietary trading in their mind with banking and do not distinguish between them.

Iceland’s government is now considering a revolutionary monetary proposal – removing the power of commercial banks to create money by making loans and handing it to the central bank. The proposal was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. He obviously does not understand finance at all. Just amazing.

This whole effort is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008 whereby they do not understand the causing of the business cycle very much like Marx himself. Mr Sigurjonsson amazingly claims the problem each time arose from ballooning credit during a strong economic cycle. He totally fails to grasp that historically this is the swing between Public and Private confidence. At times, people want private assets and then swing back and want cash. In this proposal, not even gold could rise – everything must be flat lined, which is the very objective of Communism – kill the business cycle.

Sigurjonsson argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. He is proposing that since the creation of money, which occurs as soon as a commercial bank offers a line of credit, is the entire problem. He has ignored human nature and assumes he can just turn everyone into drones eliminating human emotion. This is precisely what Communism was all about.

He argues that the central bank can only try to influence the money supply with its monetary policy tools. Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. Then you will have bureaucrats eventually bribed to provide loans to friends. The banking crisis of ancient Athens in 354BC was precisely that. The government controlled the money deposited in the temple and it was being secretly lent out to friends to speculate in real estate.

Sigurjonsson wrote that “Crucially, the power to create money is kept separate from the power to decide how that new money is used”.

“As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.

Sigurjonsson’s proposal is that Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. What he misses entirely, is that the banks were influenced by the NY boys who sold this idea of transactional banking to Europe, which has blown up in the face of bankers everywhere. But the NY Boys are back at it again. This is NOT relationship banking and they sold products in Iceland that buried the people saddling them with risk they did not understand. In Iceland, foreign capital poured in to lend money on inflation-indexed mortgages signed before the 2008 financial crisis typically denominated in foreign currency. Greeks borrowed in Swiss francs to save interest and lost when the Swiss went up 30%. I saw the same thing during the 1980s in Australia. This is bankers selling loans in foreign currency as a scheme to save money, yet this does not increase the domestic money supply for it is still denominated in another currency. So this proposal misses the entire problem. Regulate that loans domestically CANNOT be offered by banks in any currency other than the local currency for local transactions and we would be getting closer to the mark. This is the two-tier monetary system I have been talking about.

Iceland was hit hard as the crash of US investment bank Lehman Brothers caused the collapse of its three largest banks. The NY Boys let Lehman go to get a monopoly. Bear Stearns refused to participate in the Long-Term Capital Management bailout back in 1998 so letting Lehman and Bear collapse was NY politics. They rushed to save AIG ONLY because Goldman Sachs would have collapsed and they were protected since they stuffed their people in government everywhere based upon all the information and belief running around so many sources.

Iceland then became the first western European nation in 25 years to appeal to the International Monetary Fund to save its battered economy all because the NY Boys blew them up. This was not the fact that they create money through lending.

But as always, the analysis is shallow and they do not understand the world of international finance. It is not the creation of money by lending. This is the proprietary products and trading inspired by the NY Boys sold to the world.